At the time of writing, the cryptocurrency market is worth around $934 billion. That’s down from a market cap of over $3 trillion at the end of 2021. Despite the losses, that still makes cryptocurrency a very big market. The result is that financial advisors are often asked about cryptocurrency. Clients want to know if they should invest, or how they should invest, in this market. Finding the right financial advisor is essential if you are considering buying crypto as part of your overall portfolio.
How does your advisor talk about crypto?
It is tempting to treat cryptocurrency as an investment because people have made money from it. In fact, a lucky few have become very wealthy. But that’s the key word when it comes to the crypto market: luck. Most investors who buy cryptocurrency lose their money, but this seems like a huge opportunity as successful investors tend to grab the headlines. They amass huge fortunes virtually overnight and people love a good get-rich-quick story.
A seasoned advisor who understands cryptocurrency will likely recommend that you keep your money in more stable growth investments. Buy cryptocurrency with disposable income, if any, that you would use to buy a beer, a video game, or a hand of poker. It is money that you have already budgeted for consumption (i.e. you spend it and it is gone). If you’re making money, great! If you lose that money, as most people have, it’s an expected loss.
Understanding Cryptocurrency Fundamentals vs. Technicals
There are two main reasons why the cryptocurrency market is rightly considered a bet rather than an investment asset. Technical indicators say it is one of the most volatile assets in the market. The way an asset’s price changes over time, and all the many ways to analyze this information, are called an asset’s technical indicators, or “technics” for short.
Technical indicators for a given cryptocurrency are, quite simply, everywhere. They follow very few consistent patterns and can double or halve within days or even hours. It is difficult, if not impossible, to make long-term plans around an asset that has no predictable movement.
Cryptocurrency has no fundamental value
Fundamental value determines what an asset would be worth if you didn’t sell it. For example, the fundamental value of a stock is that you own part of the underlying company. You are entitled to dividends, payments and shareholder returns and to a portion of any sale or liquidation price. This asset has measurable value even if no one wants it, and it helps people decide if they want it.
Fundamental value is one of the most important ways for investors to gauge the long-term price of an asset. If the underlying value is strong, they can invest knowing that other investors are likely to want to buy their asset or that they can hold it and make a profit. No cryptocurrency in the market today has demonstrated fundamental value.
Some tokens, like Bitcoin, offer themselves as alternative forms of currency. But no major economy uses cryptocurrency in this way. Others, like Ethereum, offer themselves as “utility tokens”. This means that you are buying the cryptocurrency to access certain products or services. But in the 14 years that blockchain has been in the market, no project has introduced a viable commercial product based on utility tokens or any other blockchain-based design.
This market has no fundamental value to guide investors. You invest because you think other people will invest. You sell because you think others will sell. This leads to unpredictability and volatility at all levels. A financial advisor who understands cryptocurrency will be able to discuss the asset in these terms rather than the greed or fear that dominates many discussions.
What does cryptocurrency do
Blockchain databases attempt to solve the problem of digital ownership. This is a problem that has followed the Internet since its invention. By definition, a computer copies any file it sees. There’s no way to stop this, it’s literally how computers work. Historically, digital security was about preventing computers from keeping that copy, or forcing computers to restrict access to a file they had copied.
A blockchain database tries to solve this problem from another angle. They allow unlimited access to a file while permanently attaching the title deed. So, for example, John Smith might own the 123ABC token. You can make unlimited copies of this file as each copy will say “Token 123ABC owned by John Smith”.
This is the theory behind all blockchain-based products. Monetary cryptocurrencies, like Bitcoin, are based on the idea that the database will permanently record who owns each monetary unit. More advanced projects like decentralized applications, basically streaming software that runs on the hard drives and processors of other computers, and decentralized finance have no necessary connection to blockchain databases. Developers use utility tokens for these projects as a form of security and monetization.
The problem with this technology is that it has extremely limited applications. In some cases, blockchain-based tokens have yet to demonstrate any value. Instead of using the energy and time-consuming technology of a utility token to build your decentralized application, for example, you can simply sell access on a subscription basis.
Understanding the Crypto Market
Even if your financial advisor can’t talk about all the technicalities of blockchain itself, they should be able to analyze the financial market for the value of crypto. At the very least, if they wish to make buy recommendations, they should be able to explain how the price of a specific crypto has risen and fallen over time, which is causing the price to fluctuate and to what to expect in the future. It’s well within their specialty as a financial advisor to understand before making recommendations with your money.
For example, the first half of 2022 was a tough six months for cryptocurrencies as inflation rose and the market stumbled. If an advisor cannot provide evidence of what happened in the market and what they expect the market to do, it would be unwise to follow their recommendation. It is the same with the stock market or other investment options.
An advisor who understands the crypto market will be able to discuss how the blockchain works and specific coins. Alternatively, at the bare minimum, they should be able to discuss the crypto market as it relates to price fluctuation. Keep in mind that crypto is not a potential asset you can invest in that has fundamental value like stocks or real estate and is very risky, that’s why it’s important to have a financial advisor by your side who understands this before you spend your money.
Tips for Investing in Crypto
Balancing the risk versus the reward of crypto can be difficult, as can choosing which crypto to invest in. A financial advisor who understands the crypto market can help you understand how it fits into your financial plan. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Buying cryptocurrency can be a roller coaster ride, and investors should definitely consider this consumption rather than investing. But if you’re interested in long-term crypto, here’s where to start.
©iStock.com/LanaStock, ©iStock.com/hobo_018, ©iStock.com/doble-d
The post Does Your Financial Advisor Understand Crypto? appeared first on SmartAsset Blog.